Calculating Price Movements for Commodities

Calculating commodity price movements - text

The forex market moves in small increments called pips. In the commodities market we measure their price movements in ticks.

A tick is therefore the smallest possible price change for any commodity-based instrument and the size of a tick will be unique to each instrument in question.

For example, if an ounce of gold is trading at $1,700.00 and moves to $1,700.01, we say the market moved one tick. If a barrel of crude oil is trading at $90.05 and moves to $90.06, again we say it moved one tick.

Therefore for these markets a one tick movement simply refers to a one cent movement in price.

However, other instruments do not move in 1c movements. For example, soft commodities such as wheat, corn and soybeans all move in 25c increments. So let’s say wheat moved from $690.50 per (100) bushel to $690.75 we say it has moved 1 tick. If soybeans moved from 1541.50 to 1542.00, we say it moved two ticks and so on.

The increment refers to how each commodity moves i.e. the movement of a tick. It is also useful to know what it is we are buying or selling, be it barrels of oil, ounces of silver, bushels of wheat or gallons of gasoline.

The most important thing to realize when calculating the prices of commodities is that all commodities are priced in US Dollars. So to calculate the value of a tick move we simply multiply our position size by one tick.

So let’s take crude oil as an example. If we buy 100 barrels of crude oil and the price per barrel rises by $0.01 then our position profits by $1.00 (100 * 0.01). If we buy 500 barrels of crude oil that means every time the price rises by $0.01 we make $5.00. Therefore the size of our position dictates the monetary value for each tick move.

So the final calculation we must consider is if we have an account in a currency denomination other than US Dollars. So let’s say we short sell 200 ounces of gold and the price falls from $1,710.60 to $1710.10. This means the price of gold went in our favour by 50c US.

We sold 200 ounces so 200 * 0.50 equals $100. This $100 profit will be converted to the currency of our account. So if we have a euro account and the current EURUSD exchange rate is 1.3200, then we will see a profit of €75.76 in our profit and loss box for that trade.

Our broker will do this calculation for us but it is still important to understand how the figure was calculated.

For a more information on the increment movements of commodities please visit the trading conditions page on AvaTrade